Understanding the Macro-Financial Effects of Household Debt: A Global Perspective

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Summary:

We confirm the negative relationship between household debt and future GDP growth
documented in Mian, Sufi, and Verner (2017) for a wider set of countries over the period
1950–2016. Three mutually reinforcing mechanisms help explain this relationship.
First, debt overhang impairs household consumption when negative shocks hit.
Second, increases in household debt heighten the probability of future banking crises,
which significantly disrupts financial intermediation. Third, crash risk may be
systematically neglected due to investors’ overoptimistic expectations associated with
household debt booms. In addition, several institutional factors such as flexible exchange
rates, higher financial development and inclusion are found to mitigate this impact.
Finally, the tradeoff between financial inclusion and stability nuances downside risks to
growth.